Moderating effects of net export and exchange rate on profitability of firms: a two-step system generalized method of moments approach

Abstract

This study examines the effects of exchange rate and net exports on manufacturing enterprises’ profitability on the Pakistan Stock Exchange (PSX). When activity-based accounting is examined using panel data techniques, the main objective is to examine the direction and magnitude of the moderating influence of exchange rate fluctuations on net exports and the return on assets. We employed 249 manufacturing companies on the Pakistan Stock Exchange from 1999 to 2019. The Pakistani economy used a multicurrency system, using the Generalize Method of Moment (GMM) regression analysis system. The number of debtors’ days, creditors’ days, the cash conversion cycle, and the company’s return on assets all link favorably. Inventory turnover days, financial leverage, net exports, exchange rate, and return on assets are all negative. The Size and age of a business have a significant positive association with profitability but a negative relationship with Return on Assets (ROA). This study suggests that activity-based accounting improves company performance. Recognizing interdependence, net exports owing to currency rate depreciation have adverse effects. Managers may construct an appropriate measure to control activity-based working according to forex market symptoms and when macro-economic factors modify micro-economic policies’ behavior to increase ROA. Hence, debtors need to be paid early, and payables need to be paid late, but in these cases, the financial management should improve the return on assets.

IMPACT STATEMENT

This paper investigates the impact of net export and exchange rate on the profitability of firms using a statistical technique called the Two-Step System Generalized Method of Moments Approach. Understanding the factors that influence firm profitability is important for investors, policymakers, and business owners. This study specifically examines the role of net export, which refers to the difference between a country’s exports and imports, and exchange rates, which determine the value of one currency in relation to another, on firm profitability. The findings of this research have significant implications for firms operating in global markets, as they highlight the importance of understanding the impact of net exports and exchange rates on profitability. The study suggests that firms may need to adjust their strategies based on fluctuations in exchange rates and focus on increasing their net export to maintain profitability. Overall, this paper provides valuable insights into the complex relationship between net export, exchange rates, and firm profitability, which has important implications for businesses and policymakers alike.

Keywords:

• Profitability
• liquidate export
• exchange rate
• interaction variable
• system GMM

REVIEWING EDITOR:

• David McMillan [email protected], Senior Editor

SUBJECTS:

• Economics; Finance; Business, Management and Accounting

JEL CLASSIFICATONS:

• G17
• G32
• H63
• L11
• Z23

Disclosure statement

No potential conflict of interest was reported by the author(s).

Table 1. Operational definitions of the variables.

Additional information

Funding

The authors thank King Saud University for funding this work through the Researcher Supporting Project [RSP2022R481], King Saud University, Riyadh, Saudi Arabia.

Notes on contributors

Sarfraz Hussain

Sarfraz Hussain holds the position of Associate Professor of Commerce at the Govt. Graduate College of Commerce, located on Liaqat Road in Sahiwal, Punjab, Pakistan. His proficiency is in the fields of finance, accounting, and financial management. The scope of his study is on corporate finance, currency rates, and the financial performance of businesses, incorporating both micro- and macroeconomic influences on company profitability.